I think the shelf life is around 2 years if the product is micro-encapsulated. I am not aware of that supermarket, but I am sure if we go to USA supermarkets, you can find products with old shelf lives. Not all locations are fast moving.

I never said that the supermarkets were moving $200 per day. The CHBT retail outlets were selling around $200 per day. I don't have an exact count of the number of points of sales through distributors (e.g., supermarkets, pharmacies) to know what the average sales per day per supermarket might be.

China-biotics: Testimony, Forensics and the Case of the Missing Retail Outlets [View instapost]

Matt,

Your timeline is off, which makes your blog rather pointless. China-Biotics was attacked by Citron on Monday, August 30th in the afternoon when China-Biotics management was sleeping. That night, management scrambled to address the Citron hit piece. They announced an investor day to be held on September 20th. The CAO, Ms. Eva Yan, who was running the retail operation provided a list of addresses to Grayling, the Company's IR firm, to put on the website during the middle of the night. It was assumed that these addresses were retail outlet locations. I will admit that I thought the addresses were retail outlet locations as well. I admitted that I was wrong at this comment below:seekingalpha.com/autho...

After getting a chance the next day to confirm the addresses with management, it was explained that the addresses provided were never meant to be their company operated retail locations, but rather a list of distributor locations to find their retail products as I mentioned in this comment:seekingalpha.com/autho...

Grayling promptly fixed the website introduction to say: "The following is a list of sample locations where you can find our products."

The next hit piece from Chinese Company Analyst did not come out until September 9th (a full week after the Company fixed its website). Chinese Company Analyst actually helped support the Company in finding photos of China-Biotics retail products on distributor shelves from that list of addresses. There were a bunch of typos in the list of addresses in the midnight scramble to put up a quick list, but those typos were fixed as well.

If you want, based on my research, I can send you some addresses of stores that were closed in the last few months. Just give me a call. You can go and ask the current tenants who the previous tenant was to get confirmation that stores existed and were closed. You can also confirm that the stores are gone by seeing a smaller rent costs in the latest 10-Q as well as my explanation of store closing costs last quarter in my China-Biotics article:seekingalpha.com/artic...

Here are excerpts from a great article:"Takeovers may be used to enhance Chr. Hansen’s expansion of businesses supplying products destined for wine, cheese and yoghurts, Chief Executive Officer Lars Frederiksen, 52, said today in a phone interview."

“The value of leading ingredients franchises is being increasingly recognized,” Erik Sjogren, analyst at Morgan Stanley & Co., said in an investor note today. “Chr. Hansen’s portfolio positions it to leverage some of the most interesting areas in the food space: the fast-growing dairy category as well as natural ingredients like colors and probiotics.”

Great work Sean. It is really helpful to see an updated comparable company analysis to see the valuation multiples of other probiotics companies. China-Biotics is a hidden gem with tremendous growth and low valuation multiples creating a great investment opportunity. CHBT is my top stock pick for 2011 as you can read in my article:seekingalpha.com/artic...

DuPont's announcement on Monday that it is buying Danisco for $6.3 billion is an amazing development as it proves that food ingredients companies are being targeted by companies in other industries. While China-Biotics would be a great acquisition target for Danisco or Chr. Hansen, it could also be acquired by a larger group of companies in other industries looking to diversify their holdings into the food ingredient/animal feed market.

What I do is look at each individual factory from #1 to #9. If you look at my 2011 estimates for each factory, which one(s) look high to you? Based on past capacity utilization, each factory's 2011 capacity utilization looks doable.

Way before the negative report on August 30th, the Company published its June 30th 10-Q and stated: "During the quarter ended June 30, 2010, we added 1 distributor for retail products and closed 8 retail outlets, as we believe selling retail products through our distribution network is a more efficient way to grow our retail market." On the August 9th earnings call, management reiterated these points.

Therefore, it is grossly inaccurate to portray that management was involved in a cover-up of non-existent stores. In the quarter that ended September 30th, management continued the store closures that began at the end of the previous quarter. Companies are entitled to shift strategies and this one made complete sense for the following reasons:

1) Sales from retail outlets were never a large percentage of sales, but represented almost half of the employees. Retail outlet sales were 9.1%, 16%, and 16% of total retail sales in FY'08, FY'09, and FY'10 and represented 9.0%, 14.7%, and 11.7% of total net sales (including bulk) in FY'08, FY'09, and FY'10. Distributors on the other hand, represented 84% of retail sales over the past two fiscal years and as management stated in early August, distributors represented a more efficient way to grow the retail market. This is especially important as management needs to focus on building its bulk probiotics business instead of building out their own dedicated retail stores for only 14 retail products.

2) In FY'10, each retail outlet accounted for only $90,779 in sales per year. However, with a vast majority of the locations in Shanghai, the lease costs were increasing dramatically as Shanghai real estate prices has increased significantly over the past 1-2 years. In addition, the Company had 232 retail outlet employees and labor costs in major cities were also increasing dramatically. Therefore, the operating margin was dropping quickly for each store. My analysis of the margins of each store after the cost of goods sold, lease costs, and retail employees, was not pretty.

The retail locations posted on the Company's website are from sample locations supplied by distributors since a majority of the Company operated retail outlets are now closed (this was fixed the day after the sample locations were published by Grayling, the Company's IR firm, as Ms. Yan, who runs the retail business does not speak or read English). However, prior to the closing of the retail outlets, I visited several retail locations in person and saw photos of additional locations to account for approximately 20 locations. In addition, at the Company's Investor Day on September 20th, I saw a list of all 103 retail locations with addresses and copies of actual leases.

As highlighted in my latest article on China-Biotics:seekingalpha.com/artic...The closing cost was slightly more than 4.8 million RMB with 4 million RMB in lost lease and deposit costs and 0.8 million RMB in severance costs (approximately US $716,000). These costs were offset by a foreign exchange rate gain on cash of $974,854 taking the Other income / expense line to a net gain of $258,233 in Q2.

In conclusion, I can say with 100% certainty, the retail outlets did exist in the past. However, as a shareholder, I am glad that the dedicated retail outlet experiment is over and the Company can grow its business in a more efficient manner with a focus on being a food ingredients company.

If you look at the CHBT 10-Ks over the past 5 years, you will notice that their auditor is BDO Limited. BDO is a Top 10 auditor. A good place to look up auditors for Chinese stocks is this website:www.fixyou.co.uk/track...

BDO Limited has a very strong Chinese practice and is regarded as 5th largest firm after the Big 4. However, from the indications I have received, I wouldn't be surprised to see CHBT change to the Big 4 auditor next year.

The estimated EPS of $1.90-$2.00 is not for calendar year 2011, but rather the fiscal year ending in March 31, 2011. I estimate next year's EPS for CHBT at $3.23 for the fiscal year ending March 31, 2012. CCME is on a normal calendar year end. If you like CCME, own both.

I like CHBT better than CCME in 2011. I have a small position in CCME, but I don't follow it nearly as closely as I do CHBT.

One aspect of CHBT that I really like more than CCME is that CHBT has no warrants, no preferred stock, no earn-outs, and even no stock options (which will probably change next year). Basically, there is no upcoming dilution. CHBT's balance sheet and capital structure is really clean with the elimination of its convertible debt two weeks ago. The lack of upcoming dilution means that CHBT's EPS will grow significantly in the quarters and years ahead. While CCME certainly will grow net income as well, CCME's EPS growth won't be as fast as CCME's net income growth.

1) Yes, I agree that retail growth going forward has the potential to exceed 30% from both an increase in volume, pricing, and geographic reach. Mr. Song also told me that they have hired a senior manager with deep experience to oversee the retail distributor business as well as mid-level employees to expand the retail business. By the way, distributors have always represented over 84% or higher of retail sales. It was 91% in FY'08, 84% in FY'09, and FY'10, 87% in Q1FY'11, and 92% in Q2FY'11. While retail growth could exceed 30% with the entry into Beijing and other retail initiatives into the $16 billion supplements market, I wanted to come up with a base case in my analysis and not be overly promotional or set lofty goals in my valuation analysis. I would rather be pleasantly surprised if CHBT beats my forecast. For gross margins, I am assuming retail is at 63% and bulk is at 68%.

2) For FY'11, I assume EPS will be $1.87 using 23.677m weighted average diluted shares outstanding for the year. However, this is a bad way of looking at EPS since there are only 22.150m shares currently outstanding. Therefore, if you substitute 22.150m shares for the weighted average diluted shares outstanding for FY'11, you will arrive at $2.00 for EPS for this fiscal year. For FY' 12, I am just assuming the current 22.150m shares, which gets me to $3.23 for EPS. To be conservative, I am not assuming any additional stock buyback as this is my base case model.

In case you are interested, my model assumes EPS of $5.07 in FY'13; however, this is much harder to model as you need to take into account the timing and capacity utilization of Phase 2 and Yangling.

There are high technological barriers in the industry. Fermentation technology is driven by the ability to make a micro-organism (i.e. a bacteria) and produce and multiply it as much as possible, ensuring continuous yield improvement. It is not so much driven by the ability to reproduce a molecule – anyone can produce probiotic cultures in a small lab. The difficulty lies in consistently producing bacteria in large/commercial quantities – this know-how is acquired progressively over the years, and the learning curve is steep. A new entrant would need to invest many years before being able to produce probiotic cultures in an economically viable way.

The understanding of the dairy market is crucial to be successful in this market. The taste and texture of the final product is critical to the dairies and they will not accept the probiotics unless they are safe, the probiotic cultures are alive, and the product stays stable. Next, the taste and texture of the final product needs to meet their strict requirements. If anything goes wrong in the dairy, cultures providers need to be on site very quickly to address the issue.

China-Biotics spent $28 million to build Phase 1 of its 150 metric ton bulk probiotics plant and is spending another $18 million to build Phase 2. A new entrant would need to spend years getting up the learning curve and would need to make a substantial investment in plant and equipment. In order to make this project worthwhile, a new domestic competitor would need to capture a decent size of the market to make acceptable returns on its investment in time, people, and building the infrastructure necessary to compete.

That is correct, on the last call analyst call on Nov. 9th, management stated that they can ferment 3 million capsules PER DAY, not per month. However, their packaging equipment can only produce 1.2 million capsules PER DAY using 2 shifts. If you also go to your local pharmacy store or search the internet, you will find probiotic capsules selling for $0.20 to $1.00 per capsule.

The Company said on its Nov. 9th conference call that its fermentation equipment in Pudong can produce 3 million capsules per day; however, its packaging equipment is constrained to 1.2 million capsules per day (using two shifts). This daily packaging number is supported by the calculations I took when I toured the facility and saw two machines pumping out approximately 10-12 capsules per second. The Company plans to spend $3 million to match the packaging capability to its Pudong production capacity, which represents great upside potential in the retail business. In the past, the extra Pudong capacity was used to sell to bulk customers; however, the Company now has its new Qingpu facility to handle bulk sales, which leaves the Pudong facility to focus on the retail business. Currently, 90% of the Company's retail sales are in the Greater Shanghai market. However, as the additional packaging equipment is brought online, the Company can now expand throughout China as it is now doing with the announcement of adding 4 distributors in Beijing.

In Q2, the invoiced value on sales was $24.23 million, which means that $14.296 million came from invoiced retail sales since 59% of sales were from retail in Q2. It was also stated on the call that 23% of sales came from probiotic protein powder which are packaged in packets, not in capsules. These packets are packaged by a third party. Therefore, the capsule sales in Q2 are 77% of $14.296 million, or $11.008 million. The Company said that it uses two shifts per day to package 1.2 million capsules and we should assume that the packaging equipment runs 60 days per quarter. This would translate into 72 million capsules produced per quarter, which is approximately 15 cents per capsule.

If you take a look at the Company's online store at store.ule.tom.com/stor..., the average retail price per capsule is 33 cents and the median retail price is 31 cents. The most popular product is Shining Essence which sells for 25 cents per capsule. This leaves a lot of room between the 15 cents per capsule that the Company is receiving in sales versus the retail price of its products. This makes sense given that distributors take a cut of sales and the Company offers sales promotions for its products. As Chinese consumers buy more products online, China-Biotics will benefit from selling its products through multiple online distribution channels as it will enjoy a higher gross margin than using traditional distributors.